‘Security Premium Reserve’ cannot be Included in ‘Accumulated Profit’ for Computing Deemed Dividend: ITAT [Read Order]

Security Premium Reserve - Accumulated Profit -Computing Deemed Dividend - ITAT - Taxscan

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), presided over by a Judicial Member Chandra Mohan Garg and and an Accountant Member Pradeep Kumar Khedla upheld the decision of the Commissioner of Income Tax (Appeal) [CIT(A)] that the security premium reserve cannot be regarded as part of accumulated profits while deciding the case of Bhagwati Coal Movers (P) Ltd.

The appeal was filed by the Revenue against the order of the CIT(A), Faridabad raised from an assessment order passed by the Assessing Officer (AO) for the A.Y. 2013-14. 

Ajmala Stationery Pvt. Ltd. (ASPL) loaned money to the assessee during the year is among the few facts that neither the assessee nor the revenue dispute. The sum of Rs. 5,52,50,000 has indeed been added by the AO as the deemed dividend pursuant to Section 2(22)(e) of Income Tax Act, 1961.

Due to the appellant company’s ownership of more than 10% of M/s ASPL, the loan receipt is regarded by the appellant company as a dividend reception under Section 2(22)(e) of the Income Tax Act.

The assessee’s representative asserted before the CIT(A) that M/s ASPL did not have enough reserves and surpluses and that the addition could only be made to the extent of reserves and surpluses. The reserves and surplus of M/s ASPL total 25 crores rupees, but only ₹ 2,86,084 of that amount is general reserve, and the remaining amount is share premium reserve.

However as per AO, the general reserves and surplus of M/s ASPL is to the tune of Rs. 25 Crore.

Before the CIT(A), the representative for the assessee submitted that not every gain constitutes as a commercial profit and that the deeming requirements of Section 2(22)(e) of Income Tax Act are not applicable where a profit cannot be distributed as a dividend.

The CIT(A) after analysing the facts of the both side held that “the addition under Section 2(22)(e) of Income Tax Act can only be made to the extent of general reserves available with M/s ASPL which amounts to Rs.2,86,084/- and thus the addition is restricted to this and balance addition is deleted. Thus this Ground of the appellant is partly allowed.” 

The CIT(A) thus reversed the additions made by the Assessing Officer and granted relief on the disallowance of interest under Section 36(1)(iii) of Income Tax Act as well as the loan amount deemed as income of the assessee under Section 2(22)(e) of the Income Tax Act. Thus the Revenue has challenged this relief granted by the CIT(A) to assessee before the Tribunal.

The Appellate Tribunal upheld the decision of the CIT(A) and observed that the CIT(A) has restricted the addition to the extent of ‘General Reserve’ after excluding the ‘Security Premium Reserve’ which has been regarded to be outside the ambit of expression ‘accumulated profits’ under Section 2(22)(e) of the Income Tax Act and held that the security premium reserve cannot be regarded as a part of accumulated profits.

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